On paper, the numbers are impressive. Japan’s 7th Basic Energy Plan targets around 21 GW of BESS by 2040. Already, 2.5 GW (derated) have secured contracts through the first two LTDA auctions, and although another 5.6 GW didn’t win in the second round, interest remains high — with around 95 GW of projects having applied for grid connection by the end of 2024, and 7.5 GW already approved.
But despite the strong pipeline, the outlook is becoming more complex.
The third LTDA auction will allocate only 800 MW to storage, and only for assets with a duration of six hours or more. These BESS projects will have to compete against pumped hydro and other storage technologies. This reflects METI’s concerns about the ability of long-duration batteries to earn revenue on a merchant basis. Recent discussions with traders and aggregators confirm this idea, as they expressed strong preference for shorter-duration assets, typically around three hours or less.
Revenue projections are also becoming more difficult for BESS. METI’s recent decision to reduce “buy” volumes in the balancing markets — by excluding TSO out-of-market reserves — could significantly lower the prices BESS assets capture in these markets.
At the same time, renewable energy deployment (which underlies BESS revenues) is slowing. The 2040 targets for solar and wind now look too optimistic, given real-world challenges like land availability, high costs, and offshore wind supply chain constraints.
Regulatory changes add to the uncertainty. JEPX and the balancing markets are expected to merge into a simultaneous market around FY2028, but there’s still little clarity on how assets dispatch will be handled.
Even investors who are open to merchant exposure face challenges. Project financing is still in early stages, with limited participation from banks and gearing ratios reported around 50%.
For developers and investors, the path forward is narrowing. Winning an LTDA auction remains an option, but with volumes shrinking and applying only to 6 hours+ BESS, it might not be aq viable option anymore for many projects. In one of its committee this month METI has also flagged concerns that some past winners may have placed risky bets on future battery costs — and already have decided to pay penalties and drop out if prices don’t fall as expected. Non-wistanding the major reputational damage to these companies, this could negatively impact the rules of future LTDAs. As second-round winning bids likely came in at less than half the levels seen in the first round, several participants are questioning the viability of the projects.
Tolling agreements may offer a lifeline — but while verbally there’s no shortage of interest from traders and aggregators, few concrete offers have emerged. These agreements could help stabilize the market, but we’re still waiting to see actionable deals.
You can read about all the regulatory updates that impact the BESS market in our monthly report. You can also contact me directly if you want a sample.
Source: BESS grid application; Balancing markets & reserve capacity; LTDA 3